Los Angeles Tobacco Distributor is Sentenced to 15 Months in Prison and Another Pleads Guilty in the Continuing Investigation of Excise Tax Fraud

SACRAMENTO, Calif. — United States Attorney Benjamin B. Wagner and California Attorney General Kamala D. Harris announced that Jawid Wahidi, 34, of Los Angeles, was sentenced Tuesday by United States District Judge John A. Mendez to 15 months in prison for his role in a scheme to defraud the State of California of more than $800,000 in state tobacco excise taxes. Judge Mendez ordered Wahidi to pay $880,000 in restitution to the State of California, to make up for the excise tax that was not paid as a result of the scheme.

Wahidi pleaded guilty to committing mail fraud on May 10, 2011. According to his plea agreement, Wahidi, the owner of LMS International, a licensed tobacco distributorship located in Los Angeles, mailed intentionally fraudulent tobacco excise tax returns to the California Board of Equalization (BOE) that dramatically under–reported the amount of tobacco he sold in the state. Consequently, he avoided paying the majority of the excise taxes owed. California tobacco distributors of unstamped tobacco (like cigars and chewing tobacco) must report the in–state sales monthly to the BOE and pay approximately 46 percent of the wholesale price in excise taxes. Wahidi carried out the scheme by selling the majority of his tobacco to California customers at untaxed prices, and without formal invoices. He would occasionally sell smaller amounts at the fully taxed price and with legitimate invoices to serve as proof that his company was operating legitimately. Similarly, Wahidi often purchased untaxed tobacco from in–state distributors. In these instances he would typically pay for the shipments in cash. All of this was done to avoid a paper trail that law enforcement might use to unravel the scheme.

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In a separate case, Atef Shehata, 62, of Los Angeles, pleaded guilty today to committing mail fraud by engaging in the same type of scheme. According to the plea agreement, Shehata, the owner of Classic Wholesale, another licensed tobacco distributorship, ordered and received approximately $2.5 million in untaxed tobacco products from a Las Vegas tobacco distributor that would use phony company names on the invoices and shipping records. This was done to avoid a paper trail that law enforcement might use to unravel the scheme. The product was then shipped to a trucking terminal in Los Angeles instead of the defendants’ actual place of business. In a further effort to disguise this illegal activity, Classic Tobacco did report and pay tax on a small portion of the tobacco products that it received to make it appear that it was complying with the law, however, the great majority of the shipments went unreported. In this way the defendant evaded nearly $1 million in excise taxes that was owed to the State.

Shehata is scheduled to be sentenced by United States District Judge John A. Mendez on July 10, 2012. He faces a maximum statutory penalty of 20 years in prison. The actual sentence, however, will be determined at the discretion of the court after consideration of the Federal Sentencing Guidelines, which take into account a number of variables.

These cases are the product of investigations by a specialized task force comprising the U.S. Attorney’s Office, the California Attorney General’s office, the ATF, and the BOE. For the last several years, these offices have supported a task force dedicated to combating the systemic problem of tobacco excise tax evasion in California. In 2007, the BOE estimated that the state lost approximately $90 million in unstamped tobacco excise taxes to contraband distributors, and approximately $120 million in excise taxes for taxed stamped tobacco like cigarettes. Because California has a relatively high tobacco excise tax rate, it is a frequent target for contraband tobacco smugglers and tax evaders. Assistant U.S. Attorney R. Steven Lapham and California Deputy Attorney General Peter Williams, cross–designated as a Special Assistant U.S. Attorney for purposes of these cases, are prosecuting the cases.

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Bureau of Alcohol, Tobacco, Firearms and Explosives United States Department of Justice